The 5G Game Changer

The upcoming 5G rollout has significant consequences for both the wireless and fixed-line telecommunications (telecom) market place. It kicks open the door to innovations such as the “Internet of Things” (IoT) and “autonomous driving.” A broad web of global industries could produce over $12T worth of goods and services powered by 5G technology. Complete global integration will climax in 2035, but an immediate impact is expected on developed market countries in 2019. While 5G for the mobile industry is a classic, evolutionary upgrade to a much faster technology for data transmission, it will be a revolutionary development for fixed line communication. The so-called “fixed wireless” 5G is poised to mothball cable and fiber to the home in Blockbuster Video like fashion. Satellite operators such as Echostar (SATS) and cable companies such as Charter (CHTR) will receive the first sword. Through historic disruption, a world where victims from the competitive muscle coming out of “fixed wireless 5G” will litter the battlefield. 

What is 5G and Why is it a Disruptive Technology?

The so-called 5th Generation (5G) will be the first roll-out of a “next-generation” wireless technology since 2012. Unlike prior rollouts, there are meaningful differences looking down this road ahead. In addition to its traditional role in boosting mobile download speeds, 5G is designed to be a smart, secure, and an always-on productivity tool for a range of enterprises. While 3G/4G were evolutionary developments for the wireless industry, 5G is a revolutionary technology. It enables 2500x faster downloads than LTE, which means just 10 seconds to download an HD movie on your phone. Ladies and gentlemen, please fasten your seatbelts.

The implications for the home are even more profound. How do you spell disruption? The 5G-tothe-home platform may eventually replace cable/fiber and enable next-gen technology. The birth of an “internet-of-things” (IoT) creates a technology ecosystem where groups of devices become a living organism, hello SkyNet. It makes 1Gbps home broadband access a reality (10x as fast as broadband internet) and also lowers the cost to reach homes in rural areas dramatically. Furthermore, 5G will finally make autonomous driving a reality. Massive amounts of data are needed to navigate a vehicle and react to sudden changes. Today’s communication systems were never designed to handle the enormous bandwidth to support such quantities of data. This is why we see autonomous vehicles involved in countless accidents with tragic outcomes, the current infrastructure and support system is simply not capable of sound, reliable execution. As a result, many pilot programs have been canceled for safety reasons. In the new frontier, 5G will make it possible to navigate cars with extremely high precision, vehicles will work together opening this technology for the mass market.

While the development of 5G started three years ago, 2019 will be the first year we’ll see 5G technology deployed, starting in the home. The roll-out of 5G for mobile networks is expected to accelerate in 2020 when 5G handsets become widely available. A broad range of industries globally – from retail to education, transportation to entertainment, and everything in between – could produce over $12T worth of goods and services enabled by 5G mobile technology when fully integrated in 2035.

Cable’s Disruptors

For the major telecom operators, 5G is the blessing they have been waiting for. Most have been relying on mobile and fixed line revenues, and the latter is stagnating as many consumers drop home phones and only keep their mobile line. 5G enables mobile operators to offer fixed-WiFi connection to the home at much faster data speeds than cable or fiber while opening edge computing capacity for data-intensive or latency sensitive services. This is where streaming media comes in. Streaming media such as Netflix and Amazon require an enormous amount of data transmission. The availability of data storage at the edge of networks and fixed wireless speeds to the home offer immense improvements to their services. For businesses, the same dynamics apply. The availability of endless data opens the door for operators to offer cloud computing, more automated processes and data access.

Verizon is leading the way on this front. While many operators are planning to roll out 5G this year, most of it is for mobile services. Verizon, however, is already accelerating the roll out of their fixed wireless access (FWA) to the home. The company expects to offer wireless broadband for $70 per month to new and $50 per month to existing customers. Goldman Sachs estimates that within five years, Fixed Wireless Access will be a $5B business for Verizon. This would make Verizon the fourth largest residential broadband provider in the US. Verizon can initially roll-out its 5G with a minimum of costs, as it first targets customers within a 2,000-foot range of existing cell sites to deliver 5G over its high-capacity existing millimeter wave spectrum.

Major Cable at Risk, but Diversified

Major cable operators stand to lose 5% to 7% of their broadband customers to the telecom companies that offer 5G to the home. Add this to the already mounting pressure from cord cutting as an increasing number of customers decide to cancel their pay TV and just stream media from Netflix, Hulu, and Amazon, etc. With Disney and Apple now heavily investing in a full suite of streaming media, the cord-cutting is likely to escalate. Pay-TV: Currently the cord cutting is mostly concentrated in the Pay-Tv services. While the industry continues to add broadband subscribers, Pay-Tv is estimated to lose 1 million subscribers in 1Q19 vs. -692k in 1Q18. This acceleration in subscribers is most severe in the satellite-based operators such as DIRECTV (now owned by AT&T) and DISH. Some of the subscribers may migrate to cable but this is likely only buying a little bit of time for the cable sector as the competitive threat will eventually cause them to lose both customers and pricing power.

To prepare for the onslaught, Time Warner already spun out Time Warner Cable a few years ago (which was later bought by Charter) and Cablevision sold itself to French Altice. Comcast bought NBC/Universal to secure content, which has become much more valuable, and to help offset the threat to pay TV and cable. Among the cable operators, Charter is most vulnerable as they have the largest exposure to rural areas in the mid-west and the west of the US. This is where Verizon and other telecom operators will be most competitive with Fixed-Wireless access. In (sub)urban areas, cable can remain competitive for a bit longer, which is why Altice will remain somewhat unscathed in the near term. 

The Players

Among the equipment makers, Ericsson and Samsung shareholders will be smiling. The former has the most upside exposure to the wireless equipment market, while Samsung receives double-love through their 5G handsets. At the same time, these companies can take significant market share at the expense of China’s bad boy, the increasingly ostracized Huawei. We now own Samsung through the EWY South Korea ETF. The company and its suppliers make up a large share of this ETF and there’s no pure play ADR for U.S. investors. In the semiconductor sector, many chipmakers have already rallied significantly ahead of the peak 5G capex (capital investment) cycle. In the autonomous vehicle space, Nvidia (NVDA) is positioned to be a main beneficiary.

On the telecom side, Verizon (VZ) is leading the 5G rollout and has already outperformed many players dramatically. AT&T (T), which has lagged Verizon but is currently rolling out mobile 5G, can catch up in this race. This will provide more than 20% upside but patience is needed.

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